Greece: going under

The Greek prime minister George Papandreou’s call for a referendum on the bailout package agreed with the EU leaders and the IMF sounds like a move towards democracy. The Greek people are apparently going to be asked whether they want to accept or reject massive cuts in living standards, public services and employment in return for money to fund their government’s debt payment to Europe’s banks, insurance companies and pension funds that are refusing to lend to them.

But this is really a political manoeuvre by Papandreou. He is surrounded on all sides by opposition to the deal: from within his so-called ‘socialist’ party; from the trade unions; from the right and left opposition; and from the people (according to polls, 60% are against the deal). His name is mud. The Papandreou family has been ruling Greece on and off ever since the war. He wants to save his name. So he is trying to appear as the “innocent” and simply as the executor of voter’s intentions to get out of the hole he has put himself in. If he loses the vote on Friday, he can resign or call for early election without losing his face. If the parliament endorses the referendum, he can claim that the outcome is the voter’s wish which he needs to follow. He is using the typical tactic of a leader in a corner: a straight vote to shut everybody up: either accept the deal with the dreaded Troika or face being kicked out of the Eurozone and an even worse situation for the Greek populace. This is not really a referendum aimed at giving the Greek people a chance to decide their future; it is really a statement along the lines of “you are having one leg broken; but if you don’t agree to that, then both legs will be broken.”

The referendum may never happen. Papandreou has got the reluctant backing of his Cabinet but he may lose the confidence vote for his government in parliament this Friday night. So then the President may call a general election. Where would that take us? Well, the right-wing conservatives hold a lead in the polls (although most people don’t want to vote for either of the main parties). The right-wing opposition says that it would ‘renegotiate’ the bailout agreement with the EU leaders. And there is no doubt that Greece still has some bargaining ploys. If the Greeks reject the deal as it stands and the EU leaders don’t back down, then Greece will default on its debts, causing huge losses in the banks and financial institutions across Europe and also threaten to cause a debt crisis in Italy and Spain, driving the whole region into a new slump. That’s a powerful bargaining tool. But the right-wing opposition are not proposing to default on the Greek government debt. On the contrary, their idea of renegotiation is simply to change the burden of the Troika’s deal away from Greek capitalist businesses and put more of the burden onto the people. They want lower taxes on property and corporate profits; they want more privatisation and sell-offs of state assets and they want bigger cuts in public services and spending, dressing this up by arguing that lower taxes would boost growth.

There is another alternative that the referendum (if it takes place) or an election could provide. The Greek people could reject the Troika package and the government could decide to default, Argentina-style, on all its debt held by the private sector (the banks, insurance companies and private pension and hedge funds). That would cut Greek government debt by €200bn, or 80% of GDP at a stroke, halving its debt burden immediately. It could also insist that the official or public sector holders of its debt (namely, the EU governments, the emergency EU fund, the ECB and the IMF) agree to, say, a five-year grace period where there is no repayment and also a reduction in the interest they are charging. In that way, the burden of the remaining debt would be reduced sharply. The EU could also release the EU structural funds available for economic growth and jobs, worth about 6% of Greek GDP. This would provide an opportunity for the government to restore public services and increase employment (especially of tax collectors to find the missing billions that the 1% of rich Greeks have not being paying).

Reneging on its debts would mean that the Greek banks would be bust and the public sector social security fund would be seriously in deficit. But the EU deal already agreed to fund more money for the banks. They could be brought straight into public ownership and organised to provide credit for an expansion of investment, instead of buying government bonds. The social security fund could be replenished too. The government could impose capital controls on any attempt of the rich and the big corporations to spirit their cash out of Greek banks and abroad (although they have been allowed to do that already!).

No doubt, the EU leaders would refuse to accept such a ‘renegotiation’ of the bailout package. But a real socialist government in Greece could mount a huge campaign to convince other socialists in Europe and Europe’s people, that driving Europe into a slump in order to meet payments to the very banks and financial institutions that caused the crisis is the wrong way and there is an alternative. Indeed, other governments under pressure from their financial vultures could introduce similar policies so that Europe’s banking system comes under public control and is then aimed at servicing the investment needs of productive businesses and households and not just as financial speculation machines. So there would be a Europe-wide strategy for jobs and investment based on public control and ownership of credit,.

If that gained no support, Greece would probably be expelled from the Eurozone and be forced to adopt a national currency devalued by financial markets. That is no easy or preferable solution as some on the left have argued. Devaluation may make Greek exports cheaper but it will also make the debt of corporations hugely larger as those debts will still be in euros or dollars. Many Greek companies would be bankrupted. They would either be taken over by foreign concerns with huge job losses or (preferably) have to be nationalised. As for public sector finances, even excluding interest payments that would not need to be paid under a full default, government tax revenues still would not match spending unless tax collections were increased and economic growth and employment recovered. The Greeks could start printing their own drachmas but at the risk of massive inflation, already engendered by devaluation delivering much higher import prices.

But then all these headaches are going to happen any way if the Greeks vote against the EU-IMF deal. At least, if the Greeks opt for default and an alternative programme for growth, they can reduce the damage to the population at large. Under the Troika deal, they are handing over control of their economy to Europe’s capitalist leaders for at least a decade and face austerity and lower living standards in order to pay off government debt for a generation.

A recent article in the British Lancet medical journal explains what that will mean. Since the Greeks took the financial medicine of the EU bailout packages,unemployment has risen from 6.6% to 17% and youth unemployment from 18.6% to 40%. Using European Union statistics, the Lancet authors surveyed socio-demographic data obtained from 12,346 and 15,045 residents of Greece in 2007 and 2009, respectively. It records a sharp rise in people reporting their health as “bad” or “very bad.” The study attributes a marked rise in HIV infection in 2010 to increased intravenous drug use, prostitution, and weakening of HIV prevention programmes. The survey reveals a big increase in people not using physician, dental, and hospital services. The problems include long waiting times, travel difficulties, and budget cuts affecting both public and private hospitals. Hospital services have deteriorated through staff and supply shortages often remedied only through bribes. Diminished primary and preventative care services have led to high admission rates to public hospitals, up 24% in 2010, 8% so far in 2011. That trend relates also to private hospital admissions falling 25% in 2010. NGOs have long operated “street clinics” in Greece to serve immigrants, but now Greek citizens now make up 30% of users. Mental depression figures are up, and between 2007 and 2009 suicides rose by 17%; in 2010, by 25%; and in the first half of 2011, 40%. Suicide hotlines report that 25% of callers speak of serious financial difficulties. Homicide rates doubled between 2007 and 2009.

Putting the demands of the Troika to the vote of the citizens of Greece is Papandreou’s last desperate play. He sees that popular resistance to years of fiscal consolidation and ‘restructuring’ the economy to meet the demands of the bankers would make the country increasingly ungovernable. But the whole crisis also shows that the so-called solution agreed by the EU leaders only last weekend is nothing of the kind. Implementing it means a decade of misery for the people in Europe’s weaker states and years of low economic growth and high unemployment i.e. a depression.

But as there is no alternative being presented by the Greek government or by the other ‘socialist’ governments in Europe, the Greek people may still vote yes in any referendum because they fear it could be worse outside the Eurozone. Or they may yet vote in a right-wing government to implement even worse attacks on their public services.

8 Responses to “Greece: going under”

The jitters over Greece’s military amid its political crisis are now dying down, thankfully. This is relevant because Prime Minister George Papandreou’s defence minister fired the armed forces chiefs of staff on Tuesday. This move had been on the cards — according to the FT, the changeover had been discussed last month, and the officers concerned had served for the usual term. There’s more threat to civilian control of the army from veterans occupying the ministry of defence to protest pension cuts, than a genuine coup.

But this was probably the worst possible time to make the change. Markets are clearly on edge and taking fright at any political risk. Hardly the best environment to keep the bailout on the road.

The Greek military is proportionately large, on a per capita basis anyway. Only Russia is bigger.

Earlier in the year, we discussed the role of the military in preserving (or undermining) the power base of the regimes in the MENA region, which it seems appropriate to revisit in the context of Greece (and rather more interesting than the seemingly endless discussions of the EFSF, Greek Debt, etc, etc.). The more so given the unexpected announcement that Mr Papandreou intends to dismiss the chief of the defence staff and the heads of the army, navy and air force, which has rather unpleasant echoes of 1974, despite the Greek government’s protestations that it had long planned to replace the heads of the armed forces. At best the timing is unfortunate, at worst it could engender a split in the military, which could in theory at least be a seedbed for an intervention.

i think you underestimate the benefits of greece getting it’s own currency. just as long as you implement capital controls (like you suggested) you could implement a private and public debt jubilee. as much as finance hates defaulting debtors, they love capital gains more and a country completely free of debt that is investing in becoming more productive would be too good to pass up. just ask Argentina.

Papandreou was obviously informed by the EU officials and his own party that the referendum was off the table. Now it seems that Papandreou will soon be history.
Notice that all those democratic investors and banks are heaving a sigh of relief that democracy was thwarted. No commentators even mention the fact that Greeks no longer have a say in what happens.
The Greeks will have to have their say on the streets

Hi Michael
I have a question.
I was mulling over over the hypothetical situation of Greece exiting the Euro. Many pundits claim that with full control over it’s own currency (Drachma), Greece would be able to gain competitiveness through devaluation and export its way to being a new Switzerland.

I’ll leave aside the absurdity of Greece being able to go toe to toe with the Dollar, the Yen, the Euro etc. in a currency war.

One difficulty faced by Greece is low productivity of labour and one of the ways to improve this is through capital investment.

The Catch 22 of currency devaluation would be that in making Greece’s inefficient labour ‘competitive’, it would also result, as alluded to above, in making the price of imported capital goods more expensive and inhibit improving the productivity of labour…

The net result I believe would be, contrary to what most commentators would have us think, Greece ending up a closer example to the economy of Haiti than that of Switzerland’s.

To attempt to predict with any certainty what Greece’s fate would be if it fell out of the Euro, it seems that an important consideration is the productivity of labour relative to it’s competitors and trading partners.

My question is, how does one compare and measure the productivity of labour of one country against that of another?

The usual measure of ‘competitiveness’ between economies is unit labour costs i.e. the cost of employing labour per unit of production. This is really the inverse of the rate of surplus value per unit of production. This measure will move up or down, depending changes in wage rate or costs and productivity growth. Ill come back to you with the data in a future post that I plan later so you can see where Greece is in relation to other economies in the Eurozone and its prospects. That post will also cover the whole issue of whether the left should be arguing for Greece to exit the euro as a specific and first demand or not. Suffice it to say, that your fears have some basis.